CHAPTER 10

THE ROLE OF
FINANCIAL INSTITUTION
IN SOCIO-ECONOMIC
DEVELOPMENT
 The role of financial institutions in socio-economic
development
The social and economic development of any
country greatly depends on an efficient financial system.It is
responsible for financing vital programs and projects that
promote and accelerate social and economic development.
The rich countries like the United States, Japan,
France, Great Britain and the western European countries
are in a much better position to implement their plans of
development because they have sufficient funds.
Finance And our economy
Finance plays a very important function in the
economy,especially in a free enterprise economy.It deals
principles, institution, instruments, and procedures
involved in making payments of all types in the
economy.Such payments include goods and services which
are purchasedin cash and on credit.These also include
payments for intangible claims to wealth like stocks and
bonds.
BASIC REQUIREMENT OF AN EFFECTIVE
FINANCIAL SYSTEM
A financial system needs an efficient monetary system, proper
facilities for creating capital for investment, and good market
in which to buy and sell claims to wealth in order to facilitate
the investment process.The financial system must provide an
efficient way exchanging goods and services.Such medium of
exchange is money.However, money must be acceptable and
stable It must be convenient means for making payments to
all kinds of goods whether the purchase is a candy machine
worth millions of pesos.
FUNCTIONS OF FINANCIAL INSTITUTIONS
1.CREATION OF MONEY-This is a very important function of the
financial system.Creation of money is done by the banking
system.Through deposits of individuals in money is loaned out to
borrowers.
2.TRANSFERRING MONEY-This function is performed by some
financial institutions.Through checking account,money can
easilybe used for payments by writing checks.
3.ACCUMULATION OF SAVINGS
-Many different types of financial institution perporm this
function.They encourage people through various promotions
to save their money in banks.People place their money in
banks not only for interest earnings but also fo safekeeping.
4.LENDING AND INVESTING MONEY
-Thid is basic function of financial institution.The saving of
individuals that have been placed in financial institutions are
being utilized by borrowers like businessmen, farmers,
fishermen, and consumers.Some financial institution invest
all or part of the savings of individuals in shares of
ownership in business.
5.MARKETING OF CLAIMS OF WEALTH
-Saving may be invested directly or placed with financial
institutions that invest them.
6.FACILITATING THE LENDING AND INVESTING PROCESS
-Several types of financial institutions act as facilitating agencies in
the process of lending and of selling securities.
 THE ROLE OF CREDIT
Credit refers to financial loans given to various users by
financial institutions.Appropriate monetary policies can
transform credit into dynamic and powerful instrument of
achieving a high standard of living for all citizens of a country,
and a substantial growth for the whole economy.Evidently, credit
increases investments, and subsequently employment or
production, and income.When people have more incomes as a
result of employment or production, they buy more goods and
services.And this is good for all sectors of the economy.It simply
means good business for those who are engaged in the
production and marketing of goods and services.
 ALLOCATION OF CREDIT
The proper aloocation of credit is the central task of the
financial system under the leadership of Monetary Board of
the Bangko Sentral.Favorable monetary laws and policies can
develop just and efficient distribution of credit among the
various users of funds.Since credit resources are readily
scarce, particularlyin a developing economy like the
Philippines, the need for proper credit allocation is even
greater.
 DISCRIMINATION IN CREDIT ALLOCATIONS
Even in the allocation of credit resources, personal,
political, and cultural considerations exist.This is a universal
practice.Biases or discriminations in credit allocation cannot
be completely erased.There are some economic sectors or
groups which are favored while others are neglected or
discriminated.
 THE VALUE OF SAVINGS AND
INVESTMENT
The efficiency of the economy depends on the amount of investment as well
as the wisdom of investment decisions.Normally,investment is financed
mainly by savings.The accumulation o the money of the savers by the
financial institutions constitutes a capital formation which is used for
investment.

CREDIT FOR SOCIOECONOMIC

DEVELOPMENT
Socioeconomic development as a process does not only
involve social and economic factors.It also includes
political, educational, cultural, and religious factors.All
these have direct and great influence on the development
of any country.
 ECONOMIC GROWTH AND INFLATON
There are three schools of thought showing the relationship
between economic growth and inflation:
1. Continuous creeping inflation is favorable to economic
growth.The increases in price which are slight are not only
unfavorable but these are even regarded as positively promoting.
2. Price increases are regrettable, and in many ways harmful, but
these are regarded as the inevitable price to be paid for the rapid
economic groeth.in other words, it is the lesser of two evils.
3. By adopting a suitable policy, remarkable economic growth can
be realized without any creeping inflation.In the long run, economic
growth will be steadier and more lasting if a climate of monetary
stability can be simultaneously maintained.This is a prerequisite of
sound and sustained economic expansion.
 ECONOMIC GROWTH AND INFLATON
There are three schools of thought showing the relationship
between economic growth and inflation:
1. Continuous creeping inflation is favorable to economic
growth.The increases in price which are slight are not only
unfavorable but these are even regarded as positively
promoting.
2. Price increases are regrettable, and in many ways harmful,
but these are regarded as the inevitable price to be paid for the
rapid economic groeth.in other words, it is the lesser of two
evils.
3. By adopting a suitable policy, remarkable economic growth
can be realized without any creeping inflation.In the long run,
economic growth will be steadier and more lasting if a climate
of monetary stability can be simultaneously maintained.This is
a prerequisite of sound and sustained economic expansion.
ECONOMIC GROWTH WITHOUT INFLATION
In a developing economy,inflation tends to weaken the
habit of savings, and leads to speculative investment of
private capital. Furthermore, inflation stimulates the flight
of capital to other countries, and results to a harmful balance
of payments difficulties.Such unfavorable conditions may
easily lead to government controls in the hope of preventing
the disastrous effects of inflation on the economy and the
people.
 Inflation also discourage the inflow of foreign capital
which an underdeveloped economy greatly needs.Subsequently,
there will be a “hangover” of cost-inflation, foreign payments
difficulties, and the ruin of public finances.However, with
proper policies, it is possible to achieve a high and sustained
rate of economic growth, and retalively full employment
without creeping or galloping inflation.Such policies are;
1.Stop aiming at maximum economic growth, instead attain a
long-run optimum rate of growth.
2.Some temporary sacrifices of growth must be made from
time to time for the sake of stability.These are intended to
eliminate or reduce distortions in the economic structure, and
to relieve inflationary pressures in certain sectors of the
economy.
3.Monetary stability is a necessary condition of sustained and
healthy growth.However, it does not automatically produce a high
rate of growth.To support monetary stability, tjere must be;
-adequate total demand
-sufficient supply of capital
-high degree of technical progress
-meaningful reforms in values and institutions
-complement management and skilled labor
 SOCIAL JUSTICE AND DEVELOPMENT
Basically ,all development endeavors require financing.Be it a piggery, a poultry ,a
gardening, a training ,or a retail store.Such small-scale ventures appear insignificant to
national economic development.But not to a poor country like the Philippines where
top finance official funds for our development.

THE SOCIAL RESPONSIBILITY OF FINANCIAL INSTITUTIONS

Financial institutions have the social responsibility to support the socio-

economic programs of the government.Considering their financial and
managerial resources, they are in a better position to help implement the
programs of development.In extending their valuable assistance to the
development and growth of the economy and society, they invariably help
themselves.
 DISTRIBUTION OF INCOME AND WEALTH
Third world refers to the poor, developing, underdeveloped or
less developed countries.These are also agricultural
countries.The poorest countries in the world are located in
Africa, Asia, And Latin America (central and south
America).Third world countries occupy 60% of the earth’s
surface with a population of 70% of the human race.But their
share of the total world productive resources is only about 10%.
THANK
YOU!!!